Securities and Exchange Commission v. Galleon Management, LP et al

Filing 239

MEMORANDUM OF LAW in Opposition re: 232 MOTION for Summary Judgment. Memorandum of Law of Defendant Galleon Management, L.P. in Opposition to Plaintiff's Motion for Partial Summary Judgment. Document filed by Galleon Management, LP. (Gilroy, Terence)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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SECURITIES AND EXCHANGE COMMISSION,
:
:
Plaintiff,
:
:
- against :
:
RAJ RAJARATNAM, and
:
GALLEON MANAGEMENT, L.P.,
:
:
Defendants.
:
------------------------------------------------------------------------x

No. 09 Civ. 8811 (JSR)
ECF CASE

MEMORANDUM OF LAW OF DEFENDANT GALLEON MANAGEMENT, L.P. IN
OPPOSITION TO PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT

Adam S. Hakki
John A. Nathanson
Terence P. Gilroy
SHEARMAN & STERLING LLP
599 Lexington Avenue
New York, NY 10022-6069
[phone]
[phone] (facsimile)
Attorneys for Galleon Management, L.P.
Dated:

October 17, 2011
New York, New York

TABLE OF CONTENTS
Page
PRELIMINARY STATEMENT .................................................................................................... 1
RESPONSE TO LOCAL RULE 56.1 STATEMENT OF MATERIAL FACTS .......................... 2
ARGUMENT.................................................................................................................................. 3
I.

Galleon Is Not Subject to Collateral Estoppel ........................................................ 3

II.

Summary Judgment on Remedies Would Be Premature and Inappropriate........... 7
A.

The SEC’s Motion For Disgorgement on Summary Judgment is Moot..... 8

B.

Material Issues Of Fact Exist With Respect To Disgorgement .................. 9

C.

Penalties and Injunctive Relief Would Be Unnecessary and
Inappropriate As To Galleon .................................................................... 11

CONCLUSION............................................................................................................................. 13

TABLE OF AUTHORITIES
CASES
Cambridge Realty Co., LLC v. St. Paul Fire & Marine Ins. Co., 421 Fed. App’x 52
(2d Cir. 2011).....................................................................................................................10
Cent. Hudson Gas & Elec. Corp. v. Empresa Naviera Santa S.A., 56 F.3d 359
(2d Cir. 1995)...................................................................................................................5, 6
Conte v. Justice, 996 F.2d 1398 (2d Cir. 1993) ...............................................................................6
Expert Elec., Inc. v. Levine, 554 F.2d 1227 (2d. Cir. 1977)............................................................6
Hallinan v. Republic Bank & Trust Co., No. 06-CV-185, 2007 WL 39302
(S.D.N.Y. Jan. 8, 2007)........................................................................................................6
Hately v. S.E.C., 8 F.3d 653 (9th Cir. 1993) .................................................................................10
Monahan v. N.Y.C. Dep’t of Corr., 214 F.3d 275 (2d Cir. 2000) ...................................................5
N.L.R.B. v. Thalbo Corp., 171 F.3d 102 (2d Cir. 1999)..................................................................3
S.E.C. v. Commonwealth Chem. Sec., Inc., 574 F.2d 90 (2d Cir. 1978) ......................................11
S.E.C. v. First Jersey Sec., Inc., 101 F.3d 1450 (2d Cir. 1996) .................................................7, 10
S.E.C. v. Fischbach Corp., 133 F.3d 170 (2d Cir. 1997) .................................................................8
S.E.C. v. Koenig, 557 F.3d 736 (7th Cir. 2009) ..............................................................................9
S.E.C. v. Leslie, No. 07-CV-3444, 2010 WL 2991038 (N.D. Cal. July 29, 2010) .........................9
S.E.C. v. Opulentica, LLC, 479 F. Supp. 2d 319 (S.D.N.Y. 2007) .................................................8
S.E.C. v. Palmisano, 135 F.3d 860 (2d Cir. 1998)...........................................................................8
S.E.C. v. Razmilovic, No. 04-CV-2276, 2011 WL 4629022
(E.D.N.Y. Sept. 30, 2011)....................................................................................................9
S.E.C. v. Yuen, 272 Fed. App’x 615 (9th Cir. 2008) ......................................................................9
Stichting v. Schreiber, 327 F.3d 173 (2d. Cir. 2003)...........................................................3, 4, 5, 6
Taylor v. Sturgell, 553 U.S. 880 (2008) ..........................................................................................5

ii

U.S. v. Elliott, 714 F. Supp. 380 (N.D. Ill. 1989) ............................................................................8
U.S. v. Emerson, 128 F.3d 557 (7th Cir. 1997) ...............................................................................8
U.S. v. Int'l Bhd. of Teamsters, 931 F.2d 177 (2d Cir. 1990)..........................................................5
Wagner v. Barrick Gold Corp., 251 F.R.D. 112 (S.D.N.Y. 2008)...................................................9

STATUTES
Fed. R. Civ. P. 56(c) ......................................................................................................................10

iii

Defendant Galleon Management, L.P. (“Galleon”) respectfully submits this
memorandum of law, together with its counterstatement of material facts, in opposition to the
motion for partial summary judgment of plaintiff Securities and Exchange Commission (the
“SEC”).
PRELIMINARY STATEMENT
The SEC seeks partial summary judgment against Raj Rajaratnam and Galleon with
respect to the alleged insider trades in this action that were also the subject of substantive counts
in the criminal judgment against Mr. Rajaratnam. The SEC’s motion would only partially
dispose of this action.
The SEC’s motion does not establish collateral estoppel as to Galleon. Galleon was not a
party to the criminal case. As a result, it is subject to collateral estoppel only if the SEC can
establish that Galleon was in privity with Mr. Rajaratnam at the time of his criminal trial. The
SEC has not attempted this showing, let alone established privity as a matter of law. Instead, the
SEC argues that because Galleon is (in the SEC’s view) vicariously liable for Mr. Rajaratnam’s
conduct under the doctrine of respondeat superior, collateral estoppel necessarily has been
established. That is incorrect as a matter of settled law. The doctrines of respondeat superior
and collateral estoppel are distinct, and the presence of one does not establish the other. They
focus on different time periods and are adjudged under different standards. Respondeat superior
has relatively broad application. Privity, on the other hand, is more narrowly construed in
keeping with the due process considerations associated with barring a party from defending itself
based on a prior action in which it did not participate.
Because collateral estoppel is not established as to Galleon, the Court need not reach the
SEC’s request for partial summary judgment with respect to remedies. Moreover, even if
consideration of remedies were appropriate, there would be no basis for summary judgment

against Galleon on those issues. First, the stipulated forfeiture order in the criminal case has
effectively mooted the SEC’s claim for disgorgement on summary judgment. The recovery the
SEC seeks is “joint and several” as to Galleon and Mr. Rajaratnam, and the same allegedly illgotten gains cannot be disgorged twice. Second, injunctive relief is inappropriate on its face
because Galleon is no longer a going concern, has de-registered as an investment advisor, and
poses no risk of future violations of the securities laws. Third, the assessment of any penalty
against Galleon would be inappropriate. The filing of this action and Mr. Rajaratnam’s highlypublicized arrest put an end to Galleon (a once large and highly valuable business) as a going
concern. That, coupled with the criminal sentence, fine and agreed forfeiture already imposed, is
more than sufficient to satisfy the government’s stated need to punish Mr. Rajaratnam and
Galleon. Imposing additional penalties would be inequitable and serve no legitimate purpose.
The SEC’s motion for partial summary judgment against Galleon should be denied.
RESPONSE TO LOCAL RULE 56.1 STATEMENT OF MATERIAL FACTS
Galleon’s response to the SEC’s Local Civil Rule 56.1 statement of undisputed material
facts is set forth in Galleon’s accompanying response to the SEC’s 56.1 statement. The SEC’s
motion for partial summary judgment relies entirely on the judgment in the Government’s
criminal case against Mr. Rajaratnam. Galleon is not – and has never been – a party to the
criminal case, and the SEC has failed to demonstrate privity between Mr. Rajaratnam and
Galleon as required for the criminal judgment to establish facts in this action against Galleon.

2

ARGUMENT
I.

Galleon Is Not Subject to Collateral Estoppel
As noted, the SEC’s motion for partial summary judgment against Galleon is based

entirely on the purported collateral estoppel effect of the judgment in the criminal case against
Mr. Rajaratnam. The SEC concedes, as it must, that Galleon was not a party to the criminal
case. Nevertheless, the SEC argues that Galleon is collaterally estopped solely because – in the
SEC’s view – Galleon is vicariously liable under the doctrine of respondeat superior for the
conduct upon which Mr. Rajaratnam was convicted and sentenced. Plaintiff Securities and
Exchange Commission’s Memorandum in Law in Support of its Motion for Partial Summary
Judgment Against Defendants Raj Rajaratnam and Galleon Management, L.P. 2, 6, 16-17 (“SEC
Br.”). The Second Circuit has squarely rejected this argument, holding that respondeat superior
and collateral estoppel are “distinct” doctrines, and that one does not establish the other.
Stichting v. Schreiber, 327 F.3d 173, 186 (2d. Cir. 2003).
“Collateral estoppel applies only against a party to a previous adjudication and that
party’s ‘privies.’” Id. at 184 (quoting N.L.R.B. v. Thalbo Corp., 171 F.3d 102, 109 (2d Cir.
1999)). Because Galleon undisputedly was not a party to Mr. Rajaratnam’s criminal case,
collateral estoppel only can be established as to Galleon if it “was in privity with [Mr.
Rajaratnam] at the relevant time, i.e., during [Mr. Rajaratnam’s] trial.” Id. The “relevant time”
is what distinguishes the privity analysis that governs collateral estoppel from the respondeat
superior analysis that governs vicarious liability. As the Second Circuit has explained:
Because the doctrine of respondeat superior asks whether an agent’s action, and
his or her state of mind when he or she undertook the action, are imputable to the
principal, a relevant inquiry is the closeness of the relationship at the time of the
act in question. In contrast, because the doctrine of collateral estoppel asks
whether a party is bound by the result of a prior judicial proceeding, and thus
implicates the due process rights to notice and an opportunity to be heard, the

3

relevant inquiry is the closeness of the relationship at the time of the prior
proceeding.
Id. at 186.
The SEC’s motion for partial summary judgment erroneously “conflates” respondeat
superior and collateral estoppel and fails entirely to address the governing question: whether
Galleon was in privity with Mr. Rajaratnam with respect to his criminal trial. Id. (“[W]e must be
careful not to conflate the doctrines of collateral estoppel and respondeat superior.”) Instead of
addressing privity at the time of trial, the SEC argues only that “Galleon is liable for the acts
committed by Rajaratnam” because “[t]he misconduct of an agent” is – under the doctrine of
“respondeat superior” – “imputed to the corporation if committed within the scope of the agents’
employment.” (emphasis added) (SEC Br. 16.) The SEC then cites a series of cases concerning
vicarious or imputed liability that do not address collateral estoppel, let alone privity at the time
of trial. (Id. 16-17.)
The party invoking collateral estoppel must “establish[] as a matter of law” that privity
existed at the time of the prior proceeding, with the facts construed “in the light most favorable,”
to the non-moving party. Stichting, 327 F.3d at 186. The SEC has not even attempted to
establish privity at the time of Mr. Rajaratnam’s trial and has presented no facts that would
support summary judgment on the issue. Its brief does not even utter the word “privity.”
Accordingly, as a matter of law, the SEC’s motion for partial summary judgment should be
denied as to Galleon.
In view of the SEC’s failure to offer evidence (undisputed or otherwise) – or even
argument – on the question of privity at the time of trial, Galleon bears no burden of raising
issues of fact to defeat summary judgment. See Adickes v. S. H. Kress & Co., 398 U.S. 144,
160 (1970) (“[W]here the evidentiary matter in support of the motion does not establish the

4

absence of a genuine issue, summary judgment must be denied even if no opposing evidentiary
matter is presented.”). That said, there is nothing to indicate that the SEC could establish privity
if it tried.
Privity in the context of collateral estoppel has narrow application because of the obvious
“due process concerns” implicated by forbidding a party to litigate an issue based upon the
outcome of a prior proceeding to which it was not a party. Stichting, 327 F.3d at 184. Because
of these concerns, privity is recognized if the interests “of the person alleged to be in privity were
‘represented [in the prior proceeding] by another vested with the authority of representation.’”
Id. at 185 (quoting Monahan v. N.Y.C. Dep’t of Corr., 214 F.3d 275, 285 (2d Cir. 2000)).
Typically, privity based on representative capacity applies where the party to the prior
proceeding was explicitly representing the interests of the party sought to be estopped in the
subsequent proceeding, such as where a union president sues on behalf of the union in his
official capacity. Id. at 185 (citing U.S. v. Int’l Bhd. of Teamsters, 931 F.2d 177, 185-86 (2d Cir.
1990); see, e.g., Taylor v. Sturgell, 553 U.S. 880, 894 (2008) (beneficiaries precluded by
judgment in prior action litigated by trustee on their behalf).
The SEC does not – and could not – argue (let alone establish) that Mr. Rajaratnam
litigated his criminal case in a representative capacity. It is Mr. Rajaratnam, not Galleon, that
was indicted, tried, and sentenced, and that agreed to $53.8 million in criminal forfeiture. There
was no (and constitutionally could be no) implication or suggestion in the criminal proceeding
that the government was prosecuting anyone other than Mr. Rajaratnam and his co-defendants,
or that a non-party to the proceeding could be punished based on its outcome. None of the
hallmarks of a representative action were present.

5

The Second Circuit has recognized that privity can be applied to a party that was not
represented in the prior proceeding if that party “nonetheless exercised some degree of actual
control over the presentation of a party’s case at the previous proceeding.” Stichting, 327 F.3d at
185 (citing Cent. Hudson Gas & Elec. Corp. v. Empresa Naviera Santa S.A., 56 F.3d 359, 36869 (2d Cir. 1995)). The SEC does not argue that Galleon exercised any control over Mr.
Rajaratnam’s defense of the criminal trial. Leaving aside whether a corporation ever lawfully
could “control” a natural person’s defense of himself in a criminal proceeding, there could be no
suggestion that Galleon (which was wholly owned by Mr. Rajaratnam at the time of trial) could
or did exercise control over his defense.1 Furthermore, the fact that Mr. Rajaratnam and Galleon
were separately represented at all relevant times would weigh against any finding of privity, even
if the SEC had presented argument or evidence on these issues (which it has not). See Conte v.
Justice, 996 F.2d 1398, 1403 (2d Cir. 1993) (“[J]ust as mutuality of attorneys bolsters a finding
of control, the lack thereof dissuades us from such a finding.”).2
Having offered no evidence or argument in support of a finding of privity, and construing
all facts in Galleon’s favor as the non-moving party, the SEC’s motion for summary judgment as
to Galleon based on collateral estoppel should be denied.

1

Mere involvement in the preparation of the party’s case in the prior proceeding is not enough for a finding of actual
control. See Hallinan v. Republic Bank & Trust Co., No. 06-CV-185, 2007 WL 39302, at *9 (S.D.N.Y. Jan. 8,
2007) (declining to find control on summary judgment in the absence of a more developed record even where it was
undisputed that non-party paid for most of the party’s legal fees; received analyses of facts, legal arguments, and
claims in the prior proceeding; and appeared as a witness at the prior proceeding).
2

The fact that the individual charged in the prior proceeding (the company’s CEO) was no longer an employee of
the company sought to be estopped in the subsequent proceeding appears to have been a significant factor in the
court’s determination in Stichting that privity was absent. 327 F.3d at 186-87. This makes sense in that it would be
difficult to find that the company continued to have authority to control the actions of the CEO or that the CEO
continued to represent the company. But the mere fact that an individual who was party to the prior proceeding
continues to maintain an affiliation with (or even owns the company) does not, in and of itself, establish that he was
“representing” the company in his own criminal case, or that the company was controlling his case. The question
whether parties are in privity “is a factual determination of substance, not mere form.” Expert Elec., Inc. v. Levine,
554 F.2d 1227, 1233 (2d. Cir. 1977).

6

II.

Summary Judgment on Remedies Would Be Premature and Inappropriate
The SEC seeks the following relief in its motion for partial summary judgment:

injunctive relief against Mr. Rajaratnam and Galleon (in the form of an injunction against future
violations of Section 10(b) of the Securities Exchange Act of 1934 and Section 17(a) of the
Securities Act of 1933), as well as – jointly and severally from Mr. Rajaratnam and Galleon –
disgorgement of $31,563,661, prejudgment interest of $9,703,724.96, and “the maximum threetime civil penalty against Rajaratnam and Galleon pursuant to Section 21A of the Exchange
Act.” (SEC Br. 3.)
As a threshold matter, the SEC cannot obtain remedies as to Galleon on its motion for
partial summary judgment because, as detailed above, it has not established collateral estoppel as
to Galleon, which is the entire basis for the SEC’s motion. It is axiomatic that a court can only
impose remedies after liability has been established. See, e.g., S.E.C. v. First Jersey Sec., Inc.,
101 F.3d 1450, 1474 (2d Cir. 1996) (“Once the district court has found federal securities laws
violations” it can exercise its power to fashion appropriate remedies. (emphasis added)).
Moreover, even if the SEC could establish collateral estoppel as to Galleon, its request for
remedies on partial summary judgment would be inappropriate for multiple reasons.
After the SEC filed its motion for summary judgment, several events highly relevant to
disgorgement and penalties occurred. Mr. Rajaratnam was sentenced to 132 months (11 years)
in prison (reportedly the longest such sentence in the history of insider trading cases) and a fine
of $10 million for alleged conduct that includes all of the alleged insider trading at issue in this
action. In addition, Mr. Rajaratnam has agreed to criminal forfeiture in the amount of $53.8
million, covering the same trading and alleged gains for which the SEC seeks disgorgement on
its motion, and in an amount that includes, and indeed far exceeds, the disgorgement and interest
the SEC seeks by its motion. The SEC’s motion could not have taken account of these
7

developments before they occurred, but does not appear to acknowledge their relevance to the
appropriate remedies in this case.3
A.

The SEC’s Motion For Disgorgement on Summary Judgment is Moot

Forfeiture and disgorgement both serve the same purpose: to deprive a wrongdoer of
illicit profits. S.E.C. v. Fischbach Corp., 133 F.3d 170, 175 (2d Cir. 1997) (“The primary
purpose of disgorgement orders is to deter violations of the securities laws by depriving violators
of their ill-gotten gains”); U.S. v. Emerson, 128 F.3d 557, 567 (7th Cir. 1997) (“Forfeiture . . .
seeks to punish a defendant for his ill-gotten gains by transferring those gains from the defendant
to the . . . Department of Justice . . .”). The SEC, therefore, cannot seek disgorgement of alleged
ill-gotten gains already forfeited. See S.E.C. v. Palmisano, 135 F.3d 860, 866-67 (2d Cir. 1998)
(holding that the civil disgorgement obligation of an attorney who had run a Ponzi-like scheme
must be offset against his criminal obligation to pay restitution); S.E.C. v. Opulentica, LLC, 479
F. Supp. 2d 319, 331 (S.D.N.Y. 2007) (ordering disgorgement to be offset by the restitution in
the criminal judgment); U.S. v. Elliott, 714 F. Supp. 380, 381-82 (N.D. Ill. 1989) (defendant who
had already disgorged to the SEC the profits made in an illegal securities transaction could not
also be subject to criminal forfeiture for the same ill-gotten gains).
As is self-evident from the fact that the SEC seeks partial summary judgment entirely
based on the judgment in the criminal action, all of the conduct for which the SEC seeks
disgorgement and interest in its motion is encompassed within the $53.8 million forfeiture
amount in the criminal case. The SEC cannot argue otherwise. Because the forfeiture amount
far exceeds the disgorgement and interest amount sought, the SEC’s request for disgorgement
3

Mr. Rajaratnam’s brief in opposition to the SEC’s motion (“Rajaratnam Br.”) goes into greater detail on the facts
and arguments as they relate to his sentencing, as well as the gain calculations done in connection with his criminal
case. Rather than repeat those arguments in full here, Galleon joins in those arguments and any others in Mr.
Rajaratnam’s brief applicable to Galleon.

8

and interest is already satisfied and thus moot. The fact that Mr. Rajaratnam is paying the
forfeiture amount does not affect the analysis as to Galleon because the entire premise of the
SEC’s motion is that Galleon’s liability is vicarious, and the SEC is seeking to disgorge a unitary
and undifferentiated gain from Mr. Rajaratnam and Galleon on a “joint[] and several[]” basis.
(SEC Br. 17.)
B.

Material Issues Of Fact Exist With Respect To Disgorgement

Even if disgorgement were not mooted by the forfeiture order, the factual issues of the
amount of gains in question, and the economically appropriate way to calculate gains, would be
in dispute. The SEC does not contend that the judgment in the criminal case has any collateral
estoppel effect as to the quantum of alleged ill-gotten gains or appropriate disgorgement.
The SEC’s disgorgement calculation is based entirely on calculations made by FBI
Special Agent James Barnacle, Jr., who testified at the criminal trial. Special Agent Barnacle,
however, was offered as a summary witness, not an expert, and did not apply (or purport to
apply) an econometric analysis (such as event studies, which the SEC itself has used in the past
and which are a widely-accepted method for calculating gains or losses in securities cases4)
appropriate for the calculation of actual disgorgement or damages in a securities case.5 In any
event, Special Agent Barnacle’s calculations have been and continue to be disputed. Defendants
have proffered the expert analysis of Professor Gregg Jarrell, that concludes that the gain figures
calculated by Special Agent Barnacle significantly overstate the actual economic gain resulting
4

See, e.g., S.E.C. v. Razmilovic, No. 04-CV-2276, 2011 WL 4629022, at *18 (E.D.N.Y. Sept. 30, 2011) (“It is
undisputed that [event study] methodology is a generally accepted method of calculating the inflation in a stock’s
price in cases involving securities fraud”); S.E.C. v. Koenig, 557 F.3d 736 (7th Cir. 2009); S.E.C. v. Yuen, 272 Fed.
App’x 615 (9th Cir. 2008); S.E.C. v. Leslie, No. 07-CV-3444, 2010 WL 2991038 (N.D. Cal. July 29, 2010); Wagner
v. Barrick Gold Corp., 251 F.R.D. 112, 120 n.7 (S.D.N.Y. 2008) (“[N]umerous courts have held that an event study
is a reliable method for determining market efficiency and the market’s responsiveness to certain events or
information.”).
5

Declaration of Terence Gilroy dated Oct. 17, 2011, Ex. A (“Gilroy Decl.”).

9

from the alleged insider trading. (Rajaratnam Br. § V.A.) These genuine and material disputes
should foreclose the SEC’s request for disgorgement on summary judgment.
Defendants also dispute the SEC’s assumption that the relevant measure of gain, however
calculated, is all gains (or losses avoided) attributable to the allegedly illegal transactions,
regardless of who, in fact, received the gains sought to be disgorged. (Rajaratnam Br. § V.B.)
Disgorgement is an equitable remedy designed to “deprive violators of their ill-gotten gains,”
First Jersey Sec., Inc., 101 F.3d at 1474. Accordingly, Galleon should not be ordered to disgorge
gains it did not receive. Hately v. S.E.C., 8 F.3d 653, 656 (9th Cir. 1993) (stating that the
disgorgement of the gross amount of fees generated in violation of NASD rules is “unreasonable
and excessive” where the disgorging broker-dealer received a mere ten percent of the ill-gotten
gains”). Indeed, although the SEC has not attempted to calculate amounts actually received by
Galleon, Galleon’s former CFO has estimated that the notional gain (in the form of management
and performance fees) to Galleon on the trading gains calculated by Professor Jarrell for the
stocks at issue here totaled approximately $4.46 million (of which approximately $2.58 million
would have been notionally allocable to Mr. Rajaratnam). (Declaration of George Lau dated
Oct. 17, 2011 ¶ 13 n.4 (submitted by Mr. Rajaratnam in support of his brief).) In all events, the
disputed and factual issues of the nature and amount of gains to the defendants are not
appropriate for summary judgment. Fed. R. Civ. P. 56(c); see, e.g., Cambridge Realty Co., LLC
v. St. Paul Fire & Marine Ins. Co., 421 Fed. App’x 52, 53 (2d Cir. 2011) (“Summary judgment is
appropriate where ‘the pleadings, the discovery and disclosure materials on file, and any
affidavits show that there is no genuine issue as to any material fact and that the movant is
entitled to judgment as a matter of law.’”).

10

C.

Penalties and Injunctive Relief Would Be Unnecessary and Inappropriate As
To Galleon

Penalties and injunctive relief are not ripe for determination as to Galleon because the
SEC has not established liability or the amount of alleged ill-gotten gains. Even apart from those
threshold failures, penalties and injunctive relief plainly would be inappropriate as to Galleon at
any juncture.
As to injunctive relief, the SEC acknowledges that in order to obtain summary judgment,
there must be no genuine and material dispute that “there is a reasonable likelihood that a
defendant will commit future violations [of the securities laws]” (SEC Br. 20 (citing S.E.C. v.
Commonwealth Chem. Sec., Inc., 574 F.2d 90, 99 (2d Cir. 1978)). The SEC makes no showing
in this regard other than its statement that it has “no assurances that Galleon will not seek to do
business in the future.” (SEC Br. 21.) That is no basis for summary judgment, which would
require this Court to conclude as a matter of law that there is a “reasonable likelihood” of future
violations. Commonwealth, 574 F.2d at 99. It is also an unfounded concern. Other than to wind
down its affairs and funds, Galleon ceased operations almost immediately after Mr. Rajaratnam
was arrested. (Declaration of George Lau, dated Oct. 17, 2011 ¶ 7 (Gilroy Dec. Ex. B.).) As part
of that wind-down, Galleon voluntarily de-registered as an investment advisor and terminated its
investment management agreements with all of the funds it managed. Id. ¶ 5. With its principal,
Mr. Rajaratnam, convicted and sentenced, its investment management contracts terminated, and
its staff down to a small handful of employees and consultants necessary to complete its winddown and assist in the response to subpoenas (see id. ¶ 9), Galleon has no ability or intention “to
do business” (SEC Br. 21) in the future.
Accordingly, there is no basis for injunctive relief or reason to treat Galleon differently
from other investment advisor defendants named in the SEC’s Second Amended Complaint in

11

this action. S2 Capital Management, LP, whose principal pleaded guilty to criminal insider
trading, was voluntarily dismissed from this case on September 28, 2011, apparently without
injunction, penalty, or disgorgement. (See Gilroy Decl. Ex. C.) New Castle Funds LLC (“New
Castle”) was likewise dismissed from this case without any relief imposed against it. (See id.
Ex. D.). Mark Kurland, the co-founder of New Castle, and Danielle Chiesi, a former New Castle
employee, both pled guilty to criminal insider trading. (See id. Ex. E; Id. Ex. F.) The stipulation
of dismissal states that New Castle “is withdrawing as an investment adviser” and that “it will
not engage in further operations.” (See id. Ex. D.) Galleon would be willing to enter into the
same stipulation were the SEC to dismiss it from this case as has been the practice as to other
investment advisors in this action. In all events, the SEC has offered no basis for summary
judgment as to injunctive relief.
For largely the same reasons, imposing penalties on Galleon would be inappropriate and
serve no legitimate remedial or punitive purpose. As noted, none of the other investment advisor
entities in this action was subjected to penalties. Galleon has already experienced the de facto
punishment of losing all of its value as a market-leading going concern and being put out of
business. As evidenced by the SEC’s approach to other defendants in this action and substantial
additional precedent, punishing a defunct entity where the individual alleged wrongdoers have
been punished serves no end and would be a redundant and unduly punitive exercise.6

6

The SEC routinely declines to seek penalties from defunct or bankrupt entities after it settles with or obtains a
judgment from the company’s executives. See id. Ex. G.

12

CONCLUSION
For all of the foregoing reasons, the SEC’s motion for partial summary judgment should
be denied as to Galleon.
Dated: October 17, 2011
New York, New York
SHEARMAN & STERLING LLP

By:

/s/ Adam S. Hakki
Adam S. Hakki
John A. Nathanson
Terence P. Gilroy

599 Lexington Avenue
New York, NY 10022-6069
[phone]
[phone] (facsimile)
[e-mail]
[e-mail]
[e-mail]
Attorneys for Galleon Management, L.P.

13

CERTIFICATE OF SERVICE
The undersigned hereby certifies that a copy of the foregoing document was served by
causing a copy to be filed with the Court via CM/ECF on this 17th day of October 2011 on:
VIA CM/ECF
Valeria A. Szczepanik
Securities and Exchange Commission
New York Regional Office
3 World Financial Center, Suite 400
New York, New York 10281
[e-mail]
Attorney for Plaintiff

SHEARMAN & STERLING LLP

/s/ Terence P. Gilroy
Adam S. Hakki
John A. Nathanson
Terence P. Gilroy
599 Lexington Avenue
New York, NY 10022-6069
[phone]
[phone] (facsimile)
[e-mail]
[e-mail]
[e-mail]
Attorneys for Galleon Management, L.P.

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